Ministry mulls new taxes for auto industry protection

The Ministry of Industry and Trade is mapping out a new strategy for the auto industry, with highlights including an exemption of special consumption tax for local content of autos, and raising tax rates on pickups to levels now applicable to sedans.

A worker assembles an Innova car at a Toyota Vietnam factory in this fi le photo. The Ministry of Industry and Trade is mapping out a new strategy for the auto industry

In its draft strategy, the ministry suggests three groups of solutions to rev up the local auto industry that has remained underdeveloped despite a slew of tax incentives in the past.

First, the ministry says that measures should be taken to make sure a domestic market is large enough for automakers, and in doing so, policies should be devised to encourage consumers to choose locally-manufactured vehicles. Technical barriers will be set up and controls tightened to check imports and fight trade fraud so as to create good conditions for local automakers to grow.

For the second group of solutions, the ministry stresses that there must be policies supportive of local automakers, especially those with mainstay products, so that they can compete well with imported vehicles when import tariffs are slashed to zero in early 2018.

Changing special consumption tax on autos is a key tool in the third group of solutions. This tax will be zero for local content of autos, while corporate income tax will also be revised down for large-scale auto projects.

The ministry predicts that by 2020, Vietnam’s auto market will expand to 450,000-500,000 vehicles a year, bigger than the auto market size of the Philippines. The volume may double to 800,000-900,000 units by 2025.

If the draft strategy is endorsed, it will give a strong boost to local auto assemblers, encouraging them to increase the ratios of local content in their vehicles.

In reality, local content ratios in vehicles of less than nine seats range from 7% to 10%. Two market leaders, Thaco and Toyota Vietnam, boast high ratios, at 15-20% for the former, while Toyota Vietnam’s seven-seat Innova has a ratio of as high as 37%.

If the general special consumption tax stays at 50%, then a locally-assembled auto with local content of 40% will be subject to an overall tax rate of 30%, low enough for it to compete with imported vehicles.

However, there are concerns that the application of a flexible special consumption tax rate will be an infringement of the World Trade Organization’s rules, which require member countries to adhere to non-discrimination.

With the third group of solutions, the Ministry of Industry and Trade asks the Government and the Ministry of Planning and Investment to have policies to attract multinationals to manufacture autos in Vietnam, especially products not yet available in ASEAN. Even this policy looks unviable, as most auto giants have been present in the region, and there is no strong boon for them to move production to Vietnam as auto import tariffs will fall to zero next year.

Higher tax rates for pickups

In its strategy, the ministry also suggests raising tax rates on pickups to levels for sedans, which means drastic changes in the auto tax policy.

Pickup trucks with a load capacity of less than 1.5 tons and with five or less seats would be subject to the same import tariffs as sedans, while all other financial obligations including registration tax will also mount.

Currently, pickups – mostly imported from Thailand – are subject to an import tariff of only 5% compared to 30% for sedans, while registration tax is a mere 2% compared to sedans’ 10%. The special consumption tax for pickups currently is in the range of 15-25%, but it will shoot up to 40-110% depending on engine capacity.

Due to low taxes under the prevailing regulations, pickup sales have strongly surged lately. Last year, Vietnam imported nearly 30,000 pickups compared to a mere 2,600 units in 2010, according to the general customs department.